TAX LAW TO SEND FACTORIES, JOBS OUT OF US
In Indiana, Missouri and Pennsylvania, President Donald Trump used the same promise to sell the tax Bill: It would bring jobs streaming back to struggling cities and towns.
“Factories will be pouring into this country,” Trump told a crowd in St Charles, Missouri in November. “The tax cut will mean more companies moving to America, staying in America and hiring American workers right here.”
The Bill that Trump signed, however, could actually make it attractive for companies to put more assembly lines on foreign soil. Under the new law, income made by American companies’ overseas subsidiaries will face the US taxes that are half the rate applied to their domestic income, 10.5 per cent compared with the new top corporate rate of 21 percent.
“It’s sort of an America-last tax policy,” said Kimberly Clausing, an economist at Reed College in Portland, Ore., who studies tax policy. “We are basically saying that if you earn in the US, you pay X, and if you earn abroad, you pay X divided by two.”
What could be more dangerous for American workers, economists said, is that the Bill ends up creating a tax break for manufacturers with foreign operations. Under the new rules, beyond the lower rate, companies will not have to pay the US taxes on the money they earn from plants or equipment located abroad, if those earnings amount to 10 per cent or less of the total investment.
The Republican vision for the tax plan was to make the US a more competitive place to do business. Supporters contend that the new rules do not encourage companies to locate overseas. Rather, they say, slashing the corporate rate will make it more attractive to set up shop at home, since many other advanced economies now have higher taxes. And manufacturers do not simply follow their accountants’ advice. They consider taxes, but they also look at an array of other factors, including the local talent pool and transportation network, when deciding where to build a new plant.
Before the tax overhaul, companies had to pay the standard corporate tax on the money they earned abroad, with a top rate of 35 per cent, but only when they brought that income back into the US.
Many corporations responded by keeping their profits abroad indefinitely. A record $2.6 trillion was in offshore accounts as of 2015, according to the Joint Committee on Taxation, a congressional panel. Republicans argued that the system deprived the American economy of investments that could have financed new ventures and hiring at home.
It also meant that many multinationals effectively paid no American tax on their overseas earnings. The new bill, supporters point out, will prevent that from happening on such a large scale in the future. “It’s a vast improvement from what was on the books,” said Ray Beeman, a tax lawyer at Ernst & Young who worked on a tax reform proposal that was a precursor to the current law when he was counsel to the House Ways and Means Committee, under Republican leadership, from 2011 to 2014. To prevent an exodus of businesses from the United States, the law establishes a minimum tax rate of 10.5 percent every year.